The year 2012 proved a smooth drive for auto stocks. Listed car makers like Tata Motors along with Maruti Suzuki and Mahindra and Mahindra easily raced past the broader BSE auto index, which incidentally is at a life-time high.

Tata Motors shares gained 75 per cent over the last year while Maruti Suzuki and M&M shares are up 64 per cent and 50 per cent respectively.

Auto makers are emerging out of a bad year - car sales have grown at 9-10 per cent in this fiscal year so far. With projections of 15-16 per cent growth in the next fiscal year, auto makers will be readying their strategies to corner a larger market share.

So what can be the best auto bet in your portfolio?

Tata Motors, the country's biggest commercial vehicles maker, is a global play, with more than 90 per cent of its profits coming from the luxury car division Jaguar Land Rover.

M&M has become a must in most portfolios because of its robust growth, mainly on the back of popular diesel-powered off-road vehicles such as Scorpio and XUV 500. However, tractor sales have weighed on the company's performance. M&M is the world's biggest tractor maker by volume.

In contrast, labour problems at its Manesar plant have hit Maruti Suzuki’s productivity. Also, a shift towards diesel cars has hurt sales of its small cars.

So, how will the competition pan out between Maruti Suzuki, the country's biggest car maker, and M&M, which is the market leader in utility vehicles (UVs) segment, in 2013?

M&M faces stiff competition ahead

Recent trends show UVs are growing faster than cars as consumers now prefer larger spacious vehicles. Brokerages such as Nomura are bullish on M&M on hopes that the UV segment will continue to remain strong in 2013-14.

While M&M continues to remain the market leader in the UV segment, its 48 per cent share is lower than compared to 2011-12. The company also gained from the accelerating trend of dieselization in India. Petrol prices have gone up by over 15 per cent this year and considering that fuel expenses account for nearly 50 per cent of running costs of vehicles, M&M's portfolio of diesel powered vehicles were in huge demand.

However, things might change in 2013. One, the government is likely to hike diesel prices, as it did in September this year, to halt the pace of dieselisation. Two, 2013 will witness the launch of at least half a dozen diesel-powered cars, increasing the options for consumers.

Already, Renault has made some inroads into M&M's territory. In November, M&M's UVs and Verito sales dropped nearly 10 per cent to 24,604 against 26,932 units in October. Analysts attributed the fall in sales to the success of Renault's Duster, which managed to sell more than 6,600 units in November. The year 2013 will see the launch of Ford EcoSport compact SUV increasing competition in the UV segment.

Maruti better placed?

Credit Suisse analysts, who prefer Maruti to M&M in the four-wheeler space, say M&M had a very favourable product cycle which drove its super-normal volume growth but there is nothing too exciting going forward.

"Competition is intensifying in the UV space, as the number of global MNCs which were focusing on cars earlier now want to participate in the segment growth," the investment bank says.

Petrol cars account for 75 per cent of Maruti's total capacity, and the acclerating pace of dieselization forced the company to come up with new products. Maruti has already tasted success with the launch of Ertiga MUV, which has started eating into Toyota's immensely popular Innova in recent months. It may also be readying its own compact SUV - the XA Alpha - for launch later this year.

The company also benefits from a steep depreciation in the yen, which will boost earnings by reducing the costs of imports from Japan.

While it may be too early to say that M&M's stupendous growth may flatten out in the coming months, there can be no denying that there are tough days ahead.